Cash Management

Business analysts report that poor management is the major reason why most businesses fail. It would probably be more accurate to say that business failure is due to poor cash management. For a business to survive, proper cash management is required.

So how can you manage your cash situation better? In this section we'll take a look at the cash flow process to find out.

What is cash?

Cash is ready money in the bank or in the business. It is not inventory, it is not accounts receivable (what you are owed), and it is not property. These might be converted to cash at some point in time, but it takes cash on hand or in the bank to pay suppliers, to pay the rent, and to meet the payroll. Many people make the wrong assumption that profit growth equates to more cash, this is not always the case.

A lesson that all entrepreneurs learn is the difference between profit and cash. Profit is the amount of money you expect to make if all customers paid on time and if your expenses were spread out evenly over the time period being measured. However, it is not your day-to-day reality. Cash is what you must have to keep the doors of your business open, while you are busy trying to make a profit. Over time, a company's profits are of little value if they are not accompanied by positive net cash flow. You can't spend profit; you can only spend cash.

What is cash flow?

Cash flow simply refers to the flow of cash into and out of a business over a period of time. Watching the cash inflows and outflows is one of the major management tasks of an owner. The outflow of cash is measured by those checks you will write every month to pay salaries, suppliers, and creditors. The inflows are the cash you receive from customers, lenders, and investors.

Positive cash flow
Positive cash flow is the when the cash coming into the business is more than the cash going out. Generally a positive cash flow is very good. Like good health, a positive cash flow is something you're most aware of if you don't have it.

Negative cash flow
If the cash going "out" of the business is more than the cash coming "in" to the business, the company has a negative cash flow. A negative cash flow can be caused by a number of reasons. For example: too much or obsolete inventory or poor collections on your accounts receivable (what your customers owe you) can cause you to be short of cash. If at this point in time the business cannot borrow additional funds to support the business then it may be in serious trouble.

Practicing good cash management

• Knowing when, where, and how your cash needs will occur,
• Knowing what the best sources are for meeting additional cash needs; and,
• Being prepared to meet these needs when they occur, by keeping good relationships with bankers and other creditors.
• The starting point for avoiding a cash crisis is to develop a cash flow projection. Smart business owners know how to develop both short-term (weekly, monthly) cash flow projections to help them manage daily cash, and long-term (annual, 3-5 year) cash flow projections to help them develop the necessary capital strategy to meet their business needs. They also prepare and use historical cash flow statements to gain an understanding about where all the money went.